Saving Elderly Entitlements

You may have heard about the survey that found twice as many young people believing in UFOs as believing they will ever be able to collect Social Security. The survey result would have been more amusing if there were not so much substance to those fears about the future of Social Security.

Social Security, as it exists today, is on an unsustainable course. Medicare's future prospects are even worse. Both depend on pay-as-you-go financing; that is, the taxes collected today are used to pay benefits to today's retirees. Pay-as-you-go financing just won't work in a world with a growing number of old people and a shrinking number of taxpaying workers.

And that's the world we live in today.

Currently, about 17 percent of the nation's taxable payroll goes to paying Social Security and both parts of Medicare. When we add in other government health care programs for the elderly such as the Veterans Administration hospitals, total government spending for the elderly consumes almost one out of every five dollars of taxable payroll.

That's today, when we have about 3.3 workers for every retiree. (When the first Social Security check was paid in 1940, there were 42 workers for every retiree.) But with American women having fewer babies and people living longer, by the middle of the 21st century we can expect to have only about one point five to two workers for every retiree.

A new study by the National Center for Policy Analysis puts the problem of elderly entitlements in graphic — and frightening — terms, based on the government's own assumptions.

Social Security actuaries make three sets of assumptions — low-cost (optimistic), high-cost (pessimistic) and intermediate. If the intermediate assumptions are correct, the NCPA calculates that in 2045, when today's 20-year-old is eligible for full benefits under current law, elderly entitlements will consume twice as much of the taxable payroll as they do today — more than 40 percent.

That means that taxpayers in 2045 will be paying about the same percentage of their income for elderly entitlements that they pay today in all federal, state and local taxes.

Bear in mind that that's the intermediate forecast. If the pessimistic assumptions hold true in 2045, it will require two-thirds of all taxable income to pay for elderly entitlements.

That, mind you, is before considering any other taxes for running the rest of government. Or, for that matter, leaving something for the taxpayer's own needs.

As the NCPA study points out, there is no way any government can collect that much in taxes. People will avoid or evade paying and the underground economy will flourish.

Applying any budget surplus to saving Social Security, as proposed by President Clinton, is nothing more than more Washington doubletalk. That surplus the president referred would already be part of the Social Security trust fund. The real federal deficit is about $100 billion. The only reason we appear to be close to a balanced budget is that the federal government immediately borrows money collected for the trust fund and then counts it as part of the "unified budget." It is the same as if you earned $30,000 and then spent $50,000, including $20,000 in credit card debt, and then proclaimed that your household budget was balanced.

Let's not let budget sleight-of-hand distract us from the fact that our current system of elderly entitlements must be reformed. Other countries are in the same demographic boat, and some of them such as Britain and Chile have done something about it. They have turned away from pay-as-you-go financing and have instituted fully funded retirement systems. Each generation provides for its own retirement.

Systems such as those in Britain and Chile also encourage saving, which in turn generates higher economic growth.

If we truly reform our elderly entitlement system now so that each generation can provide for its own retirement, we can avoid cutting benefits for the elderly or raising taxes — the two approaches that seem to be most attractive to proponents of patchwork reform.

Means testing of benefits won't solve the problems of Social Security or Medicare. Neither will changing the cost-of-living adjustment . The United States is going to have to have true reform sooner or later. And sooner is going to be a lot less painful than later.